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Morningstar | TIM Brasil Reports Better-Than-Expected EBITDA Margins; We'll Likely Slightly Increase Our FVE

TIM Brasil reported 2018 results with better EBITDA margins than we expected. This was a faster improvement than we had projected, but we don’t anticipate much more expansion long term than what we already modeled. Thus, while we expect to increase our EBITDA margins somewhat, we only expect a small increase to our $15.50 per ADR fair value estimate, which will be due as much to the recent strengthening of the Brazilian real versus the U.S. dollar as higher margin expansion. We continue to believe the stock has no moat and the shares are fairly valued.

The firm reported revenue growth of 5.2% year over year in the fourth quarter, and 5% for the year, spot on with our projection. TIM’s wireless subscriber base fell 4.6% to 55.9 million, but grew its more important postpaid base 13.7% to 20.2 million, which now accounts for 36.2% of its total wireless base. While this still trails Telefonica Brasil by a large margin, TIM has made huge progress over the past two years. The higher postpaid base led to an average revenue per user, or ARPU, gain of 8.4% in the quarter to BRL 23.7 ($6.38) per month, and 11.3% for the year to BRL 22.4. We expect the continued movement of wireless customers to postpaid from prepaid will generate higher ARPU, which will push up total revenue. The fixed-line side also grew revenue 5.6%, with a 35.4% jump in TIM Live, its fibre to the home product, but off of a very low base.

TIM did a better job of controlling costs than we expected, which pushed its EBITDA margin to an all-time high of 41.7% in the quarter and 38.5% for the year versus our projection of 37.2%. However, with the incentives used to drive Christmas sales, we expect margins will decline in 2019 before growing again.